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    Japanese Spending Commitments Bode Well For Transport And Energy Projects In East Africa


    September 16, 2022 - Fitch Solutions Sector Intelligence

     

      • Infrastructure
      • MENA (Region)
      • Industry Trend Analysis
      • Fitch Solutions

      Japanese Spending Commitments Bode Well For Transport And Energy Projects In East Africa

      • 12 Sep 2022
      THIS COMMENTARY IS PUBLISHED BY FITCH SOLUTIONS COUNTRY RISK & INDUSTRY RESEARCH and is NOT a comment on Fitch Ratings' Credit Ratings. Any comments or data are solely derived from Fitch Solutions Country Risk & Industry Research and independent sources. Fitch Ratings analysts do not share data or information with Fitch Solutions Country Risk & Industry Research.

      Key View

      • New spending commitments by the government of Japan, announced at the Tokyo International Conference on African Development (TICAD) held on August 27 and 28, will not provide a substantial boost for African infrastructure financing availability overall.?However, we expect the commitments to benefit transport, grid infrastructure, and renewables projects via greater funding in the medium-term.
      • While we currently do not forecast a major increase in Japanese development finance in Africa as a whole, East Africa is set to benefit from a heightened strategic priority in line with Japan’s Free and Open Indo-Pacific Strategy.

      New spending commitments by the government of Japan, announced at the Tokyo International Conference on African Development (TICAD) held on August 27 and 28, will not provide a substantial boost for African infrastructure financing availability overall. However, we expect the commitments to benefit transport, grid infrastructure, and renewables projects via greater funding in the medium-term. At the eighth TICAD conference, the Japanese government pledged to mobilise a total of USD30bn over three years in private and government capital for aid and investments in Africa. Besides pledging support for projects in food security, education, and healthcare, the plans also include several commitments in infrastructure development finance. Here, concrete commitments were made to support transport development along three integrated logistics corridors, the East African Northern Corridor, the Nacala Corridor, and the West African Growth Ring. Furthermore, the government of Japan pledged to financially assist the construction of intra-African interconnected power pools, install 110MW of renewable energy capacity, invest in the rehabilitation of dams, and support the digitalisation of infrastructure.

      Japanese Entities Hold The Sixth Most Financing Roles In Africa
      Market

      No. of Financier Roles By Company Origin

      United States 423
      Mainland China 258
      South Africa 225
      France 169
      United Kingdom 168
      Japan 133
      Germany 129
      Note: Excludes African Development Bank and European Investment Bank. Source: Fitch Solutions Infrastructure Key Projects Data

      We at Fitch Solutions note that the funding commitments made at the eighth TICAD conference are insufficient to pose upside risks for our general infrastructure and construction industry growth forecasts for Sub-Saharan Africa and the Middle East and North Africa region. The 2022-2025 headline numbers for planned Japanese commitments to the region exceed the 2019-2022 spending commitments of USD20bn but fail to exceed the 2016-2019 amount, which matches the current planned spending of USD30bn. In addition to that, it remains unclear which portion of the headline figure will be spent on infrastructure and how effective the Japanese government’s mobilisation of private investments will be.

      Still, in our view, Japanese financing will create significant opportunities for project activity in the region, both benefitting from the significant presence of Japanese financiers and construction firms in the region and reinforcing that presence. Japanese financiers currently hold 4.3% of all financing roles in Africa, according to our proprietary Fitch Solutions Infrastructure Key Projects Data, making it the sixth largest financier in the region. In addition to that, Japanese companies hold 3.5% of all construction roles on projects at the pre-construction or construction stages in the region, making Japan the seventh largest player in Africa. The experience and knowledge of Japanese firms in relation to the African infrastructure sector as well as their existing capacity in the region will facilitate the launch of new investments over the coming years, bolstering the Japanese government’s strategy. At the same time, an injection of new funds in line with the Japanese government’s plans will help to maintain that presence over the coming years, leading Japanese firms to continue to play a significant role within the African infrastructure market.

      In particular, we expect transport, grid infrastructure, and renewables to benefit from Japanese investment plans in Africa, as they have been given priority in Japan’s latest spending commitments. This also lines up with the Japanese government’s pronounced goal to integrate climate change resilience and green development into its development aid policy, as well as with the strategic needs of Japanese companies in the region, which are often negatively affected by high transport costs and energy risks.

      While we currently do not forecast a major increase in Japanese development finance in Africa as a whole, East Africa is set to benefit from a heightened strategic prioritisation in line with Japan’s Free and Open Indo-Pacific Strategy (FOIP).?This strategy for political, military, and economic cooperation is one of the guiding principles of Japan’s foreign policy. It seeks to combine infrastructure investments, security cooperation, and economic policy to strengthen connectivity across the Indian Ocean, thus strengthening and securing Japan’s regional trade links. According to publicly available strategic documents, FOIP envisions East Africa as the Eastern border of this interconnected maritime region.

      East Africa Is The Main Destination For Japanese Energy Grid Investments in Africa
      African Markets - No. Of Projects Involving Japan-Based Financiers By Market

      Source: Fitch Solutions Infrastructure Key Projects Data

      Our view that East Africa will be a particularly high priority for Japanese infrastructure cooperation is supported by the location of two of the three transport corridors included in the eighth?TICAD statement, along Africa’s east coast.?The northern corridor connects the Port of Mombasa in Kenya to the landlocked markets of the Great Lakes Legion through rails, roads, and inland waterways. Here, the Japanese government will provide bilateral loans and grants to further upgrade the port of Mombasa and adjacent industrial facilities, as well as inland road infrastructure. The Nacala Corridor connects the Port of Nacala in Mozambique to the mining regions of Western Mozambique, Malawi, and Zambia. In this region, Japan has expressed interest in supporting road and port investments. However, Japanese company Mitsui’s decision to divest from its major stakes in local mining assets and the Nacala rail line, which connects those mines to maritime transport links, poses serious downside risks to further support for logistics projects there. In contrast to the Northern and Nacala Corridors, the West African Growth Ring seeks to connect the coastal areas of Ghana and Cote d’Ivoire and Lagos, Nigeria, as well as to their respective hinterlands and Burkina Faso. In this area, Japanese officials have expressed an interest in long-distance cargo transport modes, such as railways, inland water transport, and pipelines.

      Japan’s efforts to invest in cross-continental grid infrastructure and renewables will similarly be focused on East and East-Central Africa.?Although there are no official announcements on regional priorities, the majority of historic and announced power-grid projects financed by Japanese entities are located in the broad vicinity of the Indian Ocean. For instance, Japanese government-affiliated entities are involved in developing the East African Energy Pool (EAPP) and the Zambia-Tanzania-Kenya transmission line. Similarly, financing for renewable energy and dam projects by official development assistance agency Japan International Cooperation Agency (JICA) has been concentrated in East Africa.

      This report from Fitch Solutions Country Risk & Industry Research is a product of Fitch Solutions Group Ltd, UK Company registration number 08789939 ('FSG'). FSG is an affiliate of Fitch Ratings Inc. ('Fitch Ratings'). FSG is solely responsible for the content of this report, without any input from Fitch Ratings.

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